The percentage of Californians who smoke has dropped to an all-time low of 11.9 percent, the second-lowest in the nation behind Utah's 9.1 percent. That's good news for the health of Californians, but bad news for the state's budget and First 5 program, which funds local services for children up to age 5.

The decline in smoking was anticipated, but it has descended at a much sharper rate than predicted. As a result, California will face difficulty in funding $16 billion in bonds the state has issued since 2001. The bonds are supposed to be financed by payments from the 1998 Tobacco Master Settlement Agreement between big tobacco companies and 46 states, including California. However, the settlement payments are not fixed, but linked to tobacco sales.

Unlike many other states, California made the mistake of deciding not to take the annual payments from tobacco firms but instead borrowed money against expected receipts. Now that the payments are less, the state faces another fiscal problem.

California is one of only a few states that guaranteed some of those bonds with general fund revenue. If tobacco settlement money does not cover the debt, the state will have to pick up some of the tab. There are currently $2.9 billion in bonds outstanding that are backed by a state general fund guarantee.

To add to its fiscal woes, California went back to investors in 2007, when it issued $4.4 billion in 40-year tobacco bonds. To have sufficient revenue to pay back investors by 2047, the state assumes cigarette consumption will decline by about 1.8 percent per year.

However, because of higher taxes, anti-smoking laws and health concerns, smoking has declined by about 3 percent, and sales have dropped much more quickly than predicted.

The First 5 program, initiated by Rob Reiner's Proposition 10, also has suffered considerable revenue losses that are not likely to be made up with other state funds.

In fact, Gov. Jerry Brown tried to raid what was left of the First 5 funds, but he was blocked by counties that successfully sued to keep the money.

There will be another attempt to get more revenue from smokers with a proposed June ballot initiative to get $1 per pack tax increase on cigarettes.

Such a huge levy would boost cigarette costs to more than $7 a pack for some brands, which is likely to increase the rate of decline in smoking or create a black market, either of which could further deplete revenues to pay the tobacco bonds.

There are a couple of lessons to be learned from this situation:

First, it makes far more economic sense to accept regular long-term payments than to borrow money against them for short-term use.

And second, ever-increasing huge taxes on a product are likely to be counterproductive as use of the product declines or sales go underground.

Unfortunately, with the state's reluctance to adapt to economic realities, we are less than confident that either lesson will be learned in Sacramento.